IAS 21 The Effects of

Changes in Foreign
Exchange Rates

Day 10

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Accounting issues
 A company may engage in foreign currency operations in
two ways:
 entering directly into transactions which are denominated in
foreign currencies
 conducting foreign operations through a foreign entity
 Resultant transactions and balances must be translated into
the reporting currency for inclusion in financial statements
 Key issues
 Which exchange rate to use?
 How to treat any exchange differences?

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Key definitions
 Closing rate – spot exchange rate at the end of the
reporting period

 Foreign currency – a currency other than the entity’s

functional currency

 Foreign operation – a subsidiary, associate, joint

arrangement or branch of a reporting entity, the activities
of which are based or conducted in a country or currency
other than those of the reporting entity.

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Key definitions (contd)
 Functional currency – Currency of the primary economic
environment in which the entity operates

 Net investment in a foreign operation – the amount of the

reporting entity’s interest in the net assets of that operation

 Presentation currency – that in which the financial

statements are presented.

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Key definitions (contd)
 Monetary items – money held and assets (and liabilities) to
be received (or paid) in a fixed or determinable number of
units of currency.
 Examples include cash, loans, receivables and payables

 Non-monetary items
 Examples include non-current assets, goodwill, inventory.

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Accounting for transactions
 Record on initial recognition
 in the functional currency
 by applying the market (spot) rate
 at the date of the transaction

 Average rates may be used for all transactions in a period if

they do not fluctuate significantly.

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Monetary settlements
 Settlement in the same accounting period as initially
recognised
 exchange difference is recognised in profit or loss

 Settlement in a subsequent accounting period

 exchange difference recognised is that arising from the
beginning of the period to the date of settlement.

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Year-end balances
 Monetary balances are retranslated at the closing rate
 exchange difference is recognised in profit or loss

 Non-monetary balances are not retranslated

 they remain in the statement of financial position at their
original translated carrying values.

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Case study – Aston
On 25 October Aston buys goods from a Mexican supplier for Peso
286,000. The goods remain in inventory at the year end.

Applicable exchange rates are

25 October = $1:Peso 11.16;

16 November = $1:Peso 10.87 and on
31 December = $1:Peso 11.02

Required:

Show the accounting entries for the transactions in each of the following
situations:
(a) on 16 November Aston pays the supplier in full
(b) the supplier remains unpaid at the year end, 31 December.

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Solution – Aston (supplier paid)

$ $
25 Oct Dr Purchases
(286,000 ÷ 11.16) 25,627
Cr Trade payable 25,627

16 Nov Dr Trade payables 25,627

Dr Profit or Loss
– exchange loss
(other operating expense) 684
Cr Cash (286,000 ÷ 10.87) 26,311

Goods will remain in inventory at the year end at $25,627

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Solution – Aston (supplier not paid)
$ $

25 Oct Dr Purchases
(286,000 ÷ 11.16 ) 25,627
Cr Trade payable 25,627
31 Dec Dr Profit or Loss
– exchange loss
(other operating expense) 326
Cr Trade payable
(286,000 ÷ 11.02 – 25,627) 326

Goods will remain in inventory at the year end at $25,627

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Case study – Warrior
Warrior has a year end of 31 December 2015. On 29 November
2015 Warrior received a loan from an Australian bank of AUD
1,520,000.

The proceeds are used to finance in part the purchase of a new office
block. The loan remains unsettled at the year end.

Exchange rates are:

29 November USD 1 = AUD 1.52 and on
31 December USD 1 = AUD 1.66

Required:

Show the accounting entries for these transactions.

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 Solution – Warrior
US $000 US $000

29 Nov Dr Cash
(1,520,000 ÷ 1.52) 1,000
Cr Loan 1,000
31 Dec Dr Loan 84

Cr Profit or Loss – exchange gain

(1,520,000 ÷ 1.66 – 1,000,000) 84

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Net investment in a foreign operation
 An entity may have a monetary item that is receivable from/payable to
a foreign operation

 Where settlement is neither planned nor likely to occur in the

foreseeable future such monetary items are, in substance, part of a “net
investment in the entity”

 Exchange differences on such items are recognised in profit or loss of

the single entity

 In the consolidated accounts the exchange difference is included in

other comprehensive income and then reclassified to profit or loss on
disposal of the operation.

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